The Judgment of the Court was delivered by

Rajagopalan, J.:— These proceedings are in relation to the assessment year 1944-45. The assessee's “previous year” ended on 31st March, 1944. The assessee was then a resident of Bangalore, outside what was then British India, which constituted the taxable territories. The assessee carried on several lines of business: (1) automobile spare parts, (2) supply of butter and milk to the military authorities at Bangalore, and (3) supply of live animals, beef and mutton under contracts with military authorities not only at Bangalore Cantonment but also in what was then British India. The assessee could be taxed to Indian income-tax only, of course, on that portion of the income of his trading activities in the year of account which could be correlated to the then taxable territories. There is no difficulty now about his profits from his business in automobile spare parts or from his business in butter. With reference to military contracts for the supply of milk, live animals, beef and mutton to the army authorities, the assessee showed a net loss of Rs. 65,280. That was based on his plea that, while he made small profit over the supply of milk and a fairly reasonable profit over the supply of beef and live animals, he incurred a heavy loss to the extent of Rs. 1,29,586 over the contract for the supply of mutton. The Income-Tax Officer declined to accept the assessee's case, that he had suffered a loss over the supply of mutton under the contracts with the army authorities. The Income-Tax Officer also found cash credits in the books of the assessee, which the assessee was not able to explain. The Income-Tax Officer thereupon rejected the book results and proceeded to assess the profits of the assessee. This he did by adding a round sum of Rs. 2,00,000 to the income disclosed by the assessee. After deducting Rs. 65,280 and a further inadmissible sum of Rs. 16,192, the Income-Tax Officer arrived at the net figure of Rs. 1,50,912.

2. On appeal, the Assistant Commissioner took the view that there was no justification to add the sum of Rs. 2,00,000 to arrive at an estimate of the assessable income of the assessee for the assessment year in question. The Assistant Commissioner reduced the amount to Rs. 1,00,000. Both the assessee and the Department appealed to the Tribunal against the order of the Assistant Commissioner. On a review of the entire evidence, the Tribunal held that the evidence on record justified the addition of a sum of Rs. 1,72,721. In arriving at that figure the Tribunal came to the conclusion, that the unexplained credits in the books of the assessee amounted to Rs. 1,53,000, after accepting his explanation for a credit of Rs. 10,000, in the name of his sister Sara Bibi.

3. On application by the assessee to this court under section 66(2) of the Act, the Tribunal was directed to refer the following questions for the determination of this court:

“1. Whether on the facts and in the circumstances of this case, there is any material to justify the rejection of the accounts of the assessee by the Appellate Tribunal.

2. Whether there was any evidence to justify the finding of the Tribunal that the amount of Rs. 63,000 standing in the name of the sister was not a genuine credit and whether the Tribunal should not have recorded a finding regarding the other three items of credits in the names of the assessee and his brother and also in the charcoal account.”

4. The Tribunal submitted a case and, when the case came on for hearing, this court by its order dated 9th July, 1958, directed the Tribunal to submit a further statement of the case, virtually to answer the second question. Even the second question, by itself, referred to the omission of the Tribunal to record separate findings with reference to the credits other than those in the name of Sara Bibi. The further statement of the case has since been submitted, and the Tribunal recorded separate findings with regard to each head of credit, adhering to its original conclusion that all of them were bogus credits.

5. Though the unexplained credits constituted the subject-matter of the second question, it should be remembered that it is not a case of an addition of unexplained credits either as concealed income from known sources, or income from undisclosed sources to the amount disclosed by the assessee as his income. Those unexplained credits were taken into account by the authorities and subsequently by the Tribunal only to serve as a guidance for estimating the total income and to assess the assessable income of the assessee in the relevant year of account. It is only to that extent that we have to use the unexplained credits if the finding of the Tribunal prevails.

6. It may be easier to dispose of the second of the questions in the light of the further statement of the case submitted by the Tribunal. It may not be necessary to set out the full details discussed both in the original statement of the case and in the subsequent statement of the case. In our opinion, there was material on record on which the Tribunal could rest its conclusion, that the credits in the name of Sara Bibi, in the name of the brother and in the name of the assessee himself correlated to the charcoal business, were not genuine loans borrowed from these sources but were only fictitious credit entries. The Tribunal, in our opinion, was justified in rejecting the assessee's explanation, which had not been proved. Considering the poor circumstances in which the family started, it was difficult to accept the assessee's plea, either that his sister had large moneys of her own, or that his brother Ibrahim had large moneys of his own which he could advance to the assessee. It should also be noticed that while the Income-Tax Officer virtually took the same amount of Rs. 34,000 into account twice, once as having been advanced by Ibrahim, and again as having been invested by the assessee himself, that error was rectified, and only one such item has been taken into account in arriving finally at Rs. 1,53,000, as the unexplained cash credits which the Tribunal held to be bogus, credits.

7. The second portion of the second question does not arise for a specific answer now, in view of the specific findings recorded in the further statement of the case. Taking the whole of the second question, our answer to it is against the assessee. That answer covers all the credits.

8. Once again we have to point out that our answer to the second question only helps us to answer the first question. The first question in form raises only the validity of the rejection of the accounts of the assessee by the Appellate Tribunal. If there were unexplained cash credits, that, by itself, would certainly be a relevant factor to justify a rejection of the book results. It is not necessary in every such case that only the unexplained credits should be taken into account as income, either from disclosed or undisclosed sources, after the rejection of the accounts the Department and the Tribunal are left free to proceed with the exercise of the further statutory right of estimating the income, provided, of course, the estimate is on a reasonable and rational basis.

9. The departmental authorities accepted the assessee's figures of his gross income from his contracts (x) for the supply of beef, (2) for the supply of live animals and (3) for the supply of milk. The gross profit for the supply of beef came to Rs. 41,056; the gross profit for the supply of live animals amounted to Rs. 88,592 and that for the supply of milk amounted to Rs. 184. The Department also accepted the assessee's figure that he had expended in all a sum of Rs. 65,627, for all the items of his business. As we pointed out, while the assessee claimed that he had sustained a loss of Rs. 1,29,586, that claim was not accepted. The Tribunal agreed with the departmental authorities in accepting the figures with reference to contracts for the supply of beef, live animals and meat. The Tribunal also apparently accepted the finding of the departmental authorities, that the assessee had expended in all a sum of Rs. 65,627. The Tribunal agreed with the Department that the assessee had not suffered any loss over the contracts for the supply of mutton. But the Tribunal was of the view that the gross profits in that line of business could be estimated at ten per cent of the turnover. That the turnover was Rs. 4,31,355, was never in dispute. That was the figure furnished by the assessee himself.

10. We have set out these details only to emphasise that what the Tribunal eventually had to estimate was the profits from the contract for the supply of mutton. We have already referred to the fact, that the book results in relation to the other items of contract were accepted by the Tribunal. We have also pointed out that the unexplained cash credits could cover the income, and, in this case, the income from the known sources, the several lines of business. Those unexplained cash credits themselves would to a large extent justify the rejection of the book results. Then there were also the features adverted to both by the Income-Tax Officer and by the Assistant Commissioner in relation to the supply of mutton, which, in effect, the Tribunal accepted. To supply mutton under the contracts the assessee had to get animals and slaughter them. In addition, he used to buy mutton. The Income-Tax Officer was of the view that the purchase price of animals was highly inflated. No doubt, the assessee referred to the retail price for mutton fixed by the authorities of the Moore Market at Madras. But the departmental authorities and the Tribunal agreeing with them declined to take that as the guiding factor, because that related to the retail price at Madras. The assessee was a wholesaler, and from his own books it was found that he had purchased mutton at a little over five annas, far less than eight annas which at one time was the prevailing retail market rate in the Moore Market. There was certainly material on which the Tribunal could ultimately rest its conclusion, that the purchase price of animals to be slaughtered, so that the mutton could be supplied by the assessee, was inflated. It may not be necessary for us now to fix with any degree of precision the quantum of such inflation. The first question that had to be determined was, whether there was justification for the rejection of the book results and for the application of the proviso to section 13 of the Act. We have said enough to indicate that the Department, as well as the Tribunal, had material on which to reject the book results.

11. Though in express terms the reasonableness of the estimate ultimately made by the Tribunal is not the subject of the first question, that does arise for consideration. As we pointed out, the Tribunal ultimately estimated the profits from the contract for the supply of mutton at ten per cent of the gross turnover. This the learned counsel for the assessee challenged and he submitted that the Tribunal had no real basis in the material on record for this estimate. The learned counsel pointed out that in the proceedings before the Assistant Commissioner the Department's representative himself conceded that in a comparable case the gross profits of the contract for the supply of mutton amounted only to 0.33 per cent. No doubt that was a factor which the assessee could urge the Tribunal to take into account. The Tribunal also took into account the unexplained cash credits to the extent of Rs. 1,53,000. As we pointed out, since the assessee's book results with reference to the other items of business were accepted, the Tribunal could not be deemed to have gone wrong in taking the view that the unexplained credits should really be traceable to the profits that the assessee derived principally from the supply of mutton. Learned counsel for the assessee next urged that, while the unexplained cash credits amounted only to Rs. 1,53,000, the addition, the Tribunal sustained, would amount to a little over Rs. 1,72,000. That may not be the correct way of looking at things. Rs. 1,72,000 was arrived at after estimating the profits of the assessee from the contract for the supply of mutton at ten per cent of the gross turnover. The turnover, as we said, was Rs. 4,31,355. Ten per cent of that would amount to Rs. 43,135. That was the profit that he was held to have made and the claim of the assessee that he had incurred a loss of over Rs. 65,000 in all had to be rejected. In arriving at an addition of Rs. 1,72,000, it was only a question of arithmetical calculation, the basic features being the rejection of the assessee's claim that he had incurred a loss and the finding that on the contracts for the supply of mutton gross profits of ten per cent of the turnover would be a reasonable estimate. Judged by the test of the unexplained Gash credits, we cannot say that an estimate of ten per cent, was not reasonable in the circumstances of the case. Thus, the net position would be that the assessee's gross profits would be as follows: beef Rs. 41,056, live animals Rs. 88,592, meat Rs. 43,135, milk Rs. 184. From out of this gross profits, the assessee would be entitled to deduct an expenditure of Rs. 65,627. The balance so assessed is his income. On only a portion of that income was the assessee liable to income-tax under the Indian Income-Tax Act. The apportionment itself is not in dispute.

12. We answer the first question in the affirmative and against the assessee. As the assessee has failed he will pay the costs of this reference. Counsel's fee Rs. 250.

Reference answered accordingly.